Exempt Employees: How Employee Handbook, Plus Repeated Incidents of Salary Docking, Undermined Exempt Status

The federal Fair Labor
Standards Act (FLSA) requires that, to qualify for overtime exemption, an
employee must be paid a predetermined salary. Under the FLSA, the salary must
be at least $455 per week, and a similar California
rule pegs the minimum salary to an amount equal to two times the state minimum
wage ($2,773.33 monthly, or $33,280 a year, as of Jan. 1, 2008). You cannot reduce—or
dock—an exempt employee’s salary because of variations in the quality or
quantity of his or her work. This is known as the “salary basis” rule.

But as a new case
highlights, if you make improper deductions or simply have a policy on the
books that could permit improper deductions, you run the risk of forfeiting
exempt status for affected workers. The case also underscores the problems that
can stem from a policy that caps the amount of overtime you’ll pay.

44-Hour Weekly Cap

Giselle Ergo, Cindee
Saenger, Erica Bartelmay, Lisa Pratali, and Rhonda Andres worked for
International Merchant Services, Inc. (IMS), an Illinois-based electronic merchant
bank. IMS initially classified each of these employees as nonexempt. IMS had a “44-hour
cap” policy, which was intended to limit employees to working no more than 44
hours a week. The employees charged that under this policy, IMS would only pay for
up to 44 hours of work (including overtime)—even if an employee had to work
more than that to complete her assigned work.

Exempt Salaries Docked

Eventually, IMS
reclassified Ergo and the other workers as exempt from overtime. IMS made
various deductions from these exempt employees’ weekly salaries for partial-day
absences and disciplinary suspensions.

With respect to disciplinary
suspensions, the company’s employee handbook contained a progressive discipline
policy for both exempt and nonexempt employees that provided for suspension
without pay for a variety of offenses. On one occasion, Ergo was suspended without
pay for an “inappropriate” exchange with a co-worker, and Bartelmay was
suspended without pay for violating IMS’s Internet usage policy.

The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.

Pay Practices Challenged

Ergo and the other
employees sued IMS. First, they claimed that the 44-hour cap violated the FLSA
requirement that employees be paid for all hours worked. Second, they claimed
that after they were reclassified as exempt, IMS violated the FLSA’s salary
basis rule by imposing disciplinary suspensions without pay and deducting for
partial-day absences. IMS contended that it always paid for all hours worked.
It also argued that a few improper deductions didn’t destroy the employees’ exempt
status.

Green Light for
Employees

Now a federal court has
weighed in.1
With
respect to the 44-hour cap, the evidence was inconclusive as to whether it was
a cap on the amount IMS would pay employees—which would be illegal—or simply a
cap on the number of hours employees were permitted to work. Thus, said the
court, it was for a jury to decide whether the cap violated the FLSA.

The court went on to
rule in the employees’ favor on the docking issue. Under the FLSA, exempt
status is lost if the employer deducts from the employee’s pay for violations
of non-safety-related rules or for partial-day absences. What’s more, the
employer need not have actually docked the employee’s pay to lose the exempt
status—the salary basis rule is violated if there’s an actual practice of
making such deductions or an employment policy that creates a significant likelihood
of such deductions, the court pointed out.

Here, there was ample
evidence that IMS maintained a policy and actual practice of subjecting the
exempt employees to improper deductions for discipline or partial- day
absences. The disciplinary deduction policy in the employee handbook made no
distinction between nonexempt and exempt employees, thus creating the possibility
that exempt employees would get docked for certain policy violations. Plus, IMS
enforced the deduction policy against Ergo, Bartelmay, and more than 20 other
exempt employees. What’s more, IMS deducted for partial-day absences on
numerous occasions.

When Docking Is Permitted

To avoid problems, make
sure your policies and practices permit docking of exempt employees’ pay only
for these reasons:

1. Absences of a full
day or more for personal reasons.

2. Absences of full days
for sickness or disability for which an employee is compensated under a
sickness/ disability plan. If you don’t have such a plan, you can only deduct
for illness if the absence exceeds one week. (See CWHA December 2007 for
more on this topic.)

3. If the employee
performs no work in a week. (If the exempt employee performs any work in the
week, or doesn’t have a reasonable expectation that he or she would be free
from all work duties, a reduction in salary isn’t permitted.)

4. Days that aren’t
worked in the employee’s first and final weeks of employment.

5. Time taken off under
the state or federal family leave laws, even if less than a full day is missed.

6. Committing a major
safety violation. Note, however, that this deduction is only permitted by the
FLSA and not California law; thus, it doesn’t
apply to private employees in California
who are covered by both laws.

7. Partial-day absences
of four hours or more, provided the deduction is made from accrued paid leave time
and not current pay.

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1 Ergo v. International
Merchant Services, Inc., U.S.D.C. (N.D. Ill.)
No. 04-06789, 2007